Lindsay Corp (LNN) 2020 Q4 法說會逐字稿

Good morning. My name is Grant, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lindsay Corporation Fourth Quarter Fiscal Year 2020 Earnings Call. (Operator Instructions) Please note this event is being recorded.

During this call, management may make forward-looking statements that are subject to risks and uncertainties, which reflect management's current beliefs, estimates of future economic circumstances, industry conditions, company performance and financial results. Forward-looking statements include the information concerning possible or assumed future results of operations of the company and those statements preceded by, followed by or including the words expectation, outlook, could, may, should or similar expressions. For these statements, we claim the protection of the safe harbor forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

I'd now like to turn the call over to Mr. Tim Hassinger, President and Chief Executive Officer.

Good morning, and thank you for joining our call. With me on today's call is Brian Ketcham, our Chief Financial Officer; and Randy Wood, our Chief Operating Officer. I'd like to take this opportunity to introduce Randy whom some of you may not know. Randy was promoted to Chief Operating Officer in August of this year. He has been with Lindsay for 12 years and most recently was the President of our irrigation business. He brings a wealth of experience to this role. And with him focused on running the business, this change provides me the opportunity to focus more on growth and M&A activities. After I make some opening comments, Randy will provide a business update, and Brian will update us on the quarter's financial results.

I will start with addressing the impact of COVID-19 on our employees and business. Our highest priority continues to be our employee health and safety. We continue to proactively implement safety measures according to health organization recommendations and local government regulations. At our sites, key actions that continue are: ensuring employees are practicing social distancing; use of face coverings; enhanced cleaning and sanitation efforts; and staggered work schedules. We continue to offer work from home for roles that can be done outside of a Lindsay site. Our businesses are all classified as business essential. And I'm pleased to say that all 9 manufacturing plants are operational and running according to the local demand level.

In terms of business impact related to COVID-19 in the fourth quarter, the primary impact continues to be some project delays, but not cancellations. The rapid response team structure across the company that was put in place to address COVID-19-related issues and mitigate potential risk to the business continues to operate.

I'd now like to share with you a few highlights from fiscal year '20. The first dates go back to a commitment that was made in early 2018. At that time, we announced that through the efforts of the Foundation for Growth initiative, we would achieve 11% to 12% operating margin in fiscal year '20. Our caveat to that commitment was that we would achieve this goal in a market environment similar to fiscal year 2017. When we set that commitment, we did not foresee an ag market that would become more challenging and a global pandemic all occurring at the same time. I'm very proud of the Lindsay team to say that we achieved our fiscal year '20 goal, reaching 11.4% operating margin, especially given the challenging environment in which we were operating in. In addition to the operating margin goal, we also focused on culture and our Foundation for Growth initiative. We established a baseline back in February 2018 through the support of a major consultants employee survey to help us understand where we had opportunities to improve our organizational health and align our culture with our strategy. Our goal was to achieve first quartile status in the comparison against approximately 2,000 companies that are used in their benchmarking exercise. We have conducted an annual employee survey every year since fiscal year 2018, and I'm very pleased to say that we have achieved first quartile status in this year's survey that was conducted in the July time frame. This survey focuses on organizational health, and this result gives me the confidence to say our culture has now transformed into a strength for the company. These 2 achievements are significant for our company, and I want to thank the Lindsay employees for their dedication and commitment to meeting these goals.

Meeting our operating margin goal was not the only key financial achievement this fiscal year. In looking as far back as when Lindsay became a publicly traded company, this is the highest gross margin percent result for the company. In addition, the infrastructure business in fiscal year '20 achieved the highest revenue, operating income and operating margin since Lindsay acquired this business in 2006. And Brazil achieved its highest revenue in local currency in fiscal year '20 since this business was established in 2002. One last achievement, I want to mention. In fiscal year '20, our South Africa plant ran almost exclusively on rainwater, furthering our global focus on sustainable practices in water conservation.

Regarding our Foundation for Growth initiative, we continue to see that the margin improvement projects we implemented are delivering as expected. To go even beyond that statement, the approach taken in this initiative is rapidly becoming part of the company's culture. Focus on continuous improvement has become established throughout the company.

Now I will turn the call over to Randy to provide a business update.

Thank you, Tim, and good morning, everyone. The fourth quarter is generally a seasonal low period in the North American irrigation business. Storm damage becomes more of a market driver during the summer months. This year's storm volume was down slightly from prior year, but more than 10% below the 5-year average for the quarter. Supply and demand fundamentals saw lots of movement in the quarter. Most of this volatility was bullish for commodity prices and farm income. So our customers were pessimistic due to low commodity prices early in the quarter. We did see a steady improvement of Coronavirus Food Assistance Program, or CFAP, announced earlier this year, but through most of the quarter, growers dealt with uncertainty regarding additional support for the 2020 harvest. That was addressed with the announcement of the second round of CFAP payments in mid-September when a further $14 billion in government aid was announced.

We continue to see strong growth in technology penetration. New subscription volume for the 2020 season, inclusive of the net irrigate acquisition was up 174% versus prior year. We've also seen renewal rates approaching 97%. So we're successfully retaining customers in addition to attracting new ones.

In international irrigation, we continue to see strong results in most mature markets, including Brazil, where, as Tim mentioned, we had a record year for revenue in local currency. Market conditions in Australia have also continued to improve with recent rains, and our new expanded regional distribution center is performing very well there. International project activity remains robust. Several projects and tenders are currently visible across multiple regions, although timing is uncertain. Many of these are across the Mid-East and Africa where we continue to see irrigation projects supporting food security investments. We continued shipment of our large Mid-East project in Q4 and had our largest shipping quarter ever from our Turkey facility.

In the infrastructure business, we saw generally flat results globally in road safety products for the quarter. We continue to see adoption of the MASH-compliant product line where sales were up more than 120% versus prior year. The ABSORB-M, in particular, is doing very well due to its rapid deployment capabilities, which increase worker safety and efficiency.

We are also pleased to see that the President signed the Continuing Appropriations Act, which extended the FAST Act by 1 year. In addition to the extension, the Highway Trust Fund was infused with $13.6 billion to continue funding for important road infrastructure projects.

Road Zipper project sales were a significant contributor to the quarter on a year-over-year basis. We completed delivery of the large Highways England project in the U.K. We were able to support our clients' aggressive time line and leveraged our global manufacturing footprint to fulfill the project on time, while also pulling ahead barrier shipments to Japan to meet customer requests. These accelerated shipments allowed us to offset the impact of COVID-related project deferrals in the quarter. Our Road Zipper project funnel remains robust due to the successful implementation of our shift left strategy that provides earlier visibility of project demand. While timing of project deliveries is always difficult to predict, we have seen some planned projects get pushed out of Q1 due to uncertainty regarding the pandemic.

We are also seeing construction delays continue into the first quarter as regional and local governments manage their COVID response plans. In some cases, deliveries will be moved and in others, orders could be canceled. As previously communicated, we are working to reduce the lumpiness of our Road Zipper business by maintaining and growing a strong funnel in addition to increasing the lease portion of this business, and we are pleased with progress in both areas.

Now I'll turn it over to Brian to discuss our financial results.

Thank you, Randy, and good morning, everyone. My comments regarding fourth quarter and full year comparisons will refer to adjusted results for the prior year, which are detailed in the Regulation G disclosure at the end of the press release. No adjustments were made to current year results.

Total revenues for the fourth quarter of fiscal 2020 increased 26% to $128.4 million compared to $101.9 million in the same quarter last year. Net earnings for the quarter were $14.7 million or $1.35 per diluted share compared to net earnings of $5.8 million or $0.54 per diluted share in the prior year. Total revenues for the full year of fiscal 2020 increased 7% to $474.7 million compared to $444.1 million in the prior fiscal year. Net earnings for fiscal 2020 were $38.6 million or $3.56 per diluted share compared to net earnings of $15.6 million or $1.45 per diluted share in the prior fiscal year.

Irrigation segment revenues for the fourth quarter increased 9% to $75.6 million compared to $69.5 million in the same quarter last year.

North America irrigation revenues were $39.8 million compared to $41.5 million in the same quarter last year. The decrease resulted primarily from lower engineering services revenue related to a project in the prior year that did not repeat. Irrigation equipment unit volume and sales of replacement parts were higher in the quarter compared to the prior year, but this was offset by the impact of lower average selling prices.

In the international irrigation markets, revenues of $35.8 million increased $7.8 million or 28% compared to last year's fourth quarter. Higher sales volumes in Brazil, Australia and the Middle East were partially offset by the effect of differences in foreign currency translation rates compared to the prior year of approximately $3.4 million.

Total irrigation segment operating income for the fourth quarter was $5.8 million compared to $6.3 million in the same quarter last year, and operating margin was 7.7% of sales compared to 9% of sales in the prior year. Operating margin in the current quarter was negatively impacted by expenses of approximately $1.6 million related to an increase in the environmental remediation liability as well as severance costs. The environmental remediation liability was increased by $1 million in connection with the revised plan to remediate environmental contamination at our Lindsay, Nebraska site that was submitted to the EPA in August. Excluding the effect of the increase in the environmental remediation liability and severance costs, operating income for the quarter was $7.4 million and operating margin was 9.8% of sales.

For the full fiscal year, total irrigation segment revenues were $343.5 million compared to $351.5 million in the prior fiscal year. North America irrigation revenues of $219 million were essentially flat compared to the prior year. International irrigation revenues for the year were $124.6 million compared to $132.9 million in the prior fiscal year. After considering the unfavorable effect of differences in foreign currency translation rates of approximately $8.6 million, international irrigation revenues were also essentially flat compared to the prior fiscal year.

Irrigation operating income for the full fiscal year was $40.2 million or 11.7% of sales compared to $33.3 million or 9.5% of sales in the prior fiscal year. Operating income and margin expansion resulted primarily from improved cost and pricing performance attributed to the Foundation for Growth initiative.

Infrastructure segment revenues for the fourth quarter increased 63% to $52.8 million compared to $32.4 million in the same quarter last year. The increase resulted from higher Road Zipper system sales compared to the prior year. As Randy mentioned in his remarks, we were able to complete our deliveries for the Highways England project as well as the Japan order during the quarter.

Infrastructure segment operating income for the fourth quarter was $20.1 million, an increase of 115%, compared to $9.3 million in the same quarter last year. Infrastructure operating margin for the quarter was 38% of sales compared to 28.8% of sales in the prior year. This improvement resulted from an increase in higher-margin Road Zipper system sales and from improved cost and pricing performance.

For the full fiscal year, infrastructure segment revenues increased 42% to $131.2 million compared to $92.6 million in the prior fiscal year. Infrastructure operating income for the full fiscal year was $43.8 million compared to $16.8 million in the prior fiscal year. Operating margin for the year was 33.4% of sales compared to 18.1% of sales in the prior fiscal year.

Turning to the balance sheet and liquidity. Lindsay is well positioned with a strong balance sheet and sufficient liquidity as we continue to face the uncertainty presented by the global coronavirus pandemic. We are also well positioned to invest in growth opportunities that we identify.

Our total available liquidity at the end of the fiscal year was $190.9 million with $140.9 million in cash, cash equivalents and marketable securities and $50 million available under our revolving credit facility.

Our total debt was $115.9 million at the end of the fiscal year, of which $115 million matures in 2030. At the end of the fiscal year, we were well within the financial covenants of our borrowing facilities, including a funded debt-to-EBITDA leverage ratio of 1.5 compared to a covenant limit of 3.0.

At this time, I would like to turn the call over to the operator to take your questions.

(Operator Instructions) Our first question will come from Nathan Jones with Stifel.

Let me first say congratulations on getting to that 11% to 12% margin target this year. I'll raise my hand and say I for one was a bit skeptical that you could get there. So congratulations on making that goal. And I guess then in true Wall Street fashion, the question then becomes, what next? What have you done for me lately? Are there bigger kind of structural moves that you can continue to make within the cost structure? Or are we into a period now where it's continuous improvement grinding these margins higher? Kind of what's the plan from here to continue moving things forward?

Yes. So well, first of all, thank you, Nathan. Appreciate your acknowledgment of it. We're really pleased with the result we were able to get. To your question, if you think of the key strategic initiatives that we have brought forward during this time of Foundation for Growth implementation, we've implemented on Road Zipper, the shift left. We're continuing to expand that. We've got a good playbook in place, and we want to continue to broaden our global reach related to that.

On road safety products, we are still in the whole implementation of the MASH transition. And you know we've gone from primarily an internal business to a crash cushion business, which has been very positive.

On the irrigation side, we have a global footprint. We're putting a real emphasis around technology, and we'll continue to put an emphasis there. But I don't want to lose sight of something you said earlier because we see this as a key part of our strategy going forward is we've moved from -- we are in the process of moving from transformation to continuous improvement. And so all of the discipline and the methodology that we've gained from the Foundation for Growth, we're going to continue that in the area of continuous improvement. So sitting here today, Nathan, those would be the key areas of emphasis for us.

Maybe just continuing on -- down that continuous improvement and culture kind of line. Can you talk about the kind of things that you view as the big improvements in the culture within the organization that have helped you to drive towards this 11% to 12% margin? And where you think there's room for improvement in the culture to continue driving growth and margins going forward?

Yes, that's front and center for us. Nathan, the results I talked about were a real key factor in achieving those results was us focusing on 4 behaviors. And we even go to the point of our performance review process is aligned to those 4 behaviors. That's been a significant driver for us in improving and addressing cultural changes that we felt were critical.

If you go back when we launched Foundation for Growth, the reason we highlighted culture is because we said we've got the risk. If we didn't address culture, we would gain margin improvement, but then lose it over time if you don't impact the culture. So we're in very good shape related to that. The next stage for us is now we want to make sure our culture is very aligned with the continuous improvement focus. And this is now where our emphasis is on. We've made great progress over these last 3 years in this area. We want to continue in that, so that we have an organization that is very healthy in the way that we have measured it, and it is also very aligned to our corporate direction. And that's the areas of emphasis that we're on right now.

Great. If I could just slip one more in. There was a comment Randy made in his prepared comments about Road Zipper, potential delays and possible project cancellations. I'm going to assume those are domestic projects that you guys are talking about and related to the decline in state and local budgets and potential highway funding issues that are coming around there. Can you talk about how much of those you think may be at risk, assuming we don't get any federal government assistance, so I guess, is a caveat that goes into that? And what kind of the magnitude of these things are that might be delayed or potentially canceled if the funding doesn't come through?

Sure. And you've heard us say in the last couple of quarters and again, in today's opening statement, we have seen some delays. We do not believe we're seeing cancellations. Road Zipper, at this point, we've had approximately $10 million worth of projects that we would say have been pushed out to a later start date. We still see these projects being active. We believe there's a high probability of success occurring. We're staying close with the decision-makers related to these projects, but the timing for securing them is difficult to predict right now.

Next question will come from Brian Drab with William Blair.

Just as Nathan did, obviously, I want to say congratulations on achieving the target for the margins. And I'm looking at the year -- to the 2020 year and then looking ahead to 2021. And I mean an incredible result in infrastructure, obviously. And by my count, that included about $45 million or so in large Road Zipper project revenue. And so unfortunately, every great success, of course, creates a difficult comparison for the next year. So I'm just wondering, things like, is that large Road Zipper project revenue still your highest gross margin revenue? And if you can't duplicate that, which I assume that we'll probably not have that much large project revenue in '21, is that going to make it hard in '21 to sustain that 11% to 12% kind of operating margin? It seems like it would have to be down given what I've heard so far on the call.

Yes. So let's talk about the infrastructure business, really build on what I'd mentioned to Nathan earlier. The shift left strategy related to Road Zipper progressing exactly like we had hoped it would on the road safety, the shift of our portfolio aligned to MASH continuing to progress. And we're really pleased about the progress we're making there. Now we did have a very large project, the Highways England, that's nonrepeatable at this point. So what we see is our business outside of Highways England is continuing to move in a positive direction, but the ability to recapture that full value of the Highways England will have some challenge related to that. So direction of the business, I feel extremely good, but to be able to, in 1 year, recover that full amount of that project will be a challenge.

And right now, as you look into '21, there aren't any major projects like Japan or U.K. project right now that you're expecting to contribute revenue, right, in '21?

Yes. We've got what we believe is the best funnel -- sales funnel we've ever had, but those types of projects typically have a little longer runway to get them to a finalization. So difficult to say today whether we'll be able to get that size of project in this particular fiscal year.

Right. Okay. And then just one more question. Just on the international irrigation market. Can you talk a little bit more about what you're seeing there and expectations for '21? And if possible, can you comment on your largest competitor won this, the largest irrigation project, I think, in the history of the industry? How -- did you pass on that? Are there risks associated with that, that troubled you? Any comments you could make on that since it's such an enormous project?

Yes. So let me address the international overview and then more specifically address the project that you're referring to that recently was announced. When we look at the international business and if I break it down with mature markets versus developing regions. On the mature markets, let's start, first of all, with Brazil, I made some opening comments about the record that had been set there. We do see some planning delays that have occurred due to drought, but we see growers and expect these growers to see strong incomes going forward, and this continues to be a growing market for us. Australia is doing well after the recent rains. So we have seen market recovery in that particular area. On the developing regions, there's good signs of project demand linked to food security, especially Middle East and Africa. Timing, we'd describe as being uncertain as is often the case with these type of projects, but there's good visibility on specific projects that will go forward. So overall, we do expect to see an increase on a full year basis in this market.

Now to your very specific question about the project in Egypt that was mentioned. We're aware of the update from our competitor regarding this multiyear tender. We did participate in that tender with an offer. We would describe the offer as being very competitive at pricing levels consistent with previous project wins that have occurred in that territory. This project is consistent with other opportunities that we see in the region. We expect these opportunities to continue to be very competitive, and we will be active in this space.

Our next question will come from Jon Braatz with Kansas City Capital.

Randy, a question for you. It's been some time since we've seen grain prices at attractive levels of where they are today. And hopefully, they'll continue to be that way, we'll see. But do you sense on the domestic front that over the past 3 or 4 years, the market obviously has been depressed. Do you think there's some pent-up demand that needs that will go -- could be fulfilled with these higher grain prices? Is there an opportunity here to see some accelerated growth in the domestic front?

Yes. Thanks for your question, Jon. I think you're right. We do see growers deferring new large capital investments, maybe replacing machines that are at their end of life. There's a willingness to invest in parts and maintenance to maybe extend them for 1 more year. So I do think you're right to expect that as commodity prices have improved, net farm income has improved. Obviously, a lot of confirmed government support now as well propping up net farm income, we would expect to see some of those growers that have been deferring those investments to probably be prepared to make a decision this year. So I think you're spot on there with that assumption.

Is $4 corn a magic number?

It's always been a magic number. And we peaked above. I think I saw $4.15-plus earlier today. So that does become, I think, a magic number for growers.

(Operator Instructions) At this time, there appear to be no more questions. Mr. Hassinger, I will turn the call back to you for closing remarks.

Well, I'd like to remind everyone of our virtual investor event on Tuesday, November 17, beginning at 10:00 a.m. Eastern Time. This session will be an opportunity to hear more about our innovation and growth strategies. So this concludes our fourth quarter earnings call. Thank you for your interest and participation.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.